TL;DR Without economic growth, democracy doesn’t work because
voters occupy a zero-sum system.

The first piece of startup wisdom I
heard was “increasing your sales will fix all problems”. This turns out to be another way of phrasing
Paul Graham’s point that growth is critical, which is true for all sorts of
reasons—for example, justifying high valuations to raise large amounts of
capital in the early days, attracting the best people and paying them with
equity, providing a buffer to allow for some mistakes, and smoothing over
internal tensions.

I believe that growth is not only
critical for startups, but for most systems. Either you’re growing, or you’re slowly
dying. Perfect equilibrium is rare.

One system that seems to be in
early death throes is the United States government. There’s a lot of political rancor, which is
particularly puzzling when one considers that in the 2012 presidential
election, Obama and Romney said roughly the same thing. Dysfunction is high—the sequester, which was
supposed to be so unpalatable it would never take effect, actually (and likely
temporarily) happened last Friday because the parties couldn’t agree on an
alternative. There’s a lot of arguing over insignificant issues—enough, in
fact, to distract us from the fact that no one has new ideas on the big
issues. We have trillion dollar deficits
and no plan to reduce them, and yet the media focus on the sideshows.

A good metric for government
dysfunction is inability to pass a budget, either leading to a government
shutdown or a continuing resolution, which lets agencies continue to operate on
the previous budget, for a theoretically short time period until we can agree
on a new one. Passing a budget is a
fundamental job of Congress and the President.

As far as I can tell, the US
government managed to make it about 200 years without any shutdowns. We had one in 1976, and then a bunch more in
the 70s and 80s, plus 3 in the 90s, including one that lasted 21 days. Shutdowns have fallen out of fashion, and now
we just operate with continuing resolutions, and lots of them—for example, 21 for
the 2001 budget alone. The real issue
with shutdowns and continuing resolutions is the same—inability to agree on a
federal budget.

Every few months, there’s brief
discussion of some sort of grand bargain, but it always ends in deferral—even
the deferrals get deferred! Everyone
feels screwed, and almost no one feels like the government is doing a great
job. We can’t agree on anything, and
anyone that proposes doing something radically different doesn’t get elected.

But democracy (I’m using democracy
to include republics and other forms of government where the people get an
effectively direct say in who the leaders are) worked in the US for a long
time—we were able to make real progress, pass budgets, be the world superpower,
evolve as a country, etc. Something has
changed.

The US has been blessed with economic
growth for a very long time, first due to natural resources and massive amounts
of land in which to expand, and then due to a period of technological progress
rarely matched in human history that lasted approximately until we realized
just how dangerous nuclear bombs really were and got scared of new technology. But the frontier is long over, and although
technological innovation has continued at a blistering rate for computers and
the Internet, it seems to have slowed down in most other industries.

Growth may be the root cause of
American exceptionalism—things consistently got better every decade largely
because we were growing. People from
other countries wanted to live here, we led the world in technological
innovation, social mobility was high because everyone was getting richer, and
we had the resources to get involved around the world. This is still at least partially true.

But growth has slowed quite a
bit. Here is a graph of real GDP percentage
growth in the United States from 1950 until now, with a trendline. The trendline goes from just under 5% to just
under 2%. This is a much more
significant drop than it appears, because it compounds exponentially.

A shocking data point about how
things are going is that the median real net worth for households headed by
someone under 35 dropped 68% from 1984 to 2009, to $3,662. For those over 65, it increased 42% to
$170,494 (largely due to a gain in property values). This disparity is good evidence of a lack of
real growth (and also a very unstable situation where an older generation
benefits at the expense of a younger).

Here are two more graphs, the first
showing the US unemployment rate (the real numbers are perhaps worse, as people
drop out of the work force) and the second showing the US interest rate, both
of which make a case for slowing growth:

All of that said, in absolute sense
I’d much rather live in the world of today than 1950—it’s tough for me to
imagine living in a world without the Internet.
However, in the same way that one can feel acceleration but not
velocity, people seem more sensitive to the annual rate of improvement than the
absolute quality of life. So even though
people should be happier in an absolutely better world, no one wants to stand
still on the hedonic treadmill.

Most of us want our lives to get
better every year—the hedonic treadmill is a pain that way. In a democracy, we theoretically vote for
what we believe will improve our lives the most. In a system with economic growth, things can
improve for everyone. In a system
without growth, or even one with very little growth, that’s not the case—if
things improve for me, it has to come at the expense of things getting worse
for you. Without growth, we’re voting
against someone else’s interest as much as we’re voting for our own. This ends with lots of fighting and everyone
feeling screwed, broken into factions, and unmotivated. Democracy
does not work well in a zero-sum world.
Autocratic political systems probably work better with growth too, but
the effect of a lack of growth is likely less pronounced right up until the
revolution.

So we need to get growth back,
unless we want to see this grand experiment end. Our politicians don’t seem to have any good
ideas about how to do this. Saying “I
believe in America” and hoping that proof by vigorous assertion starts working
is not a strategy.

I believe democracy only works in a
non-zero-sum world. We are losing jobs
that we will never get back, we are borrowing money and spending it on anything
but real investment, and it feels like we are managing a slow decline. Without growth, we will head towards a
special case of Malthusian dystopia where we have plenty of junk food but not
enough of anything else.

Growth is what we should be
focusing on. Growth is great—it lets us
run deficits, it means the country is not zero-sum, it lets us invest in
innovation and continual improvement in infrastructure, it provides a buffer
for a little mismanagement, and it means tomorrow will be better than
today. Contrary to what one might
expect, growth provides long-term stability.

We must return to real growth,
growth where we do more with less.
Borrowing money to get ninety growth cents on the dollar does not count,
although that may work for a while. We have
to figure out how to fix the real problems with technological innovation—cheaper
and cleaner energy, better healthcare (15.2% of GDP in 2008 and 18.2% of GDP in
2011), better transportation, food production, and defense. GDP growth is probably the only way to fix
our national debt and entitlement problems, and it’d be better to have real
growth than inflationary growth.

How to best drive economic growth
is a difficult question. It’s easy to
say we should just invest in science and technology, and although that’s
probably right it’s easier said than done.
The government is historically bad at picking winners to invest in, but
our leaders can perhaps help reverse the cultural shift from pro-science to
anti-science. Our current culture has
shifted to be anti-science; the fear of things like genetically modified food
and robots is obviously in the way of growth.

We should strive to make jobs in
science and technology more appealing than jobs in finance (incidentally, it
should be a big red flag for growth when the brightest young people start going
into finance, since they aren’t actually creating any more wealth, just
redistributing it). Startups are probably
the best way to do this—startups let people that develop a new technology get
rich, instead of just making GE slightly richer. So we should encourage startups in whatever
way we can.

Another issue is the structure of
our national budget. We have, in startup
parlance, a high burn, and most of it can’t be considered ‘investment’ but is
instead ‘expense’. Spending money on
things like infrastructure improvement or new technology that are likely to
generate more money in the future helps growth; spending money on the so-called
entitlement programs, and parts of the military, does not. Of course medical care and defense are
important, and we have to have them—this is a tough balancing act. In some cases, the competitive nature of the
private sector may provide a better path.
Sooner or later, we are going to have an ugly conversation about our
national budget—we can delay it for a long time but not forever. The government, when it needs to spend money
at all, should aim to invest.
Considering what will drive growth is a useful framework for thinking
about the best use of resources.

We should not fear innovation or
globalization. Robots are going to
replace human workers in lots of factories; jobs that do require human labor
are going to continue to move to the lowest-cost place. But that’s ok, and these sorts of jobs are
not what will generate economic growth for us anyway. We should strive to be a net exporter of
ideas and technologies. For example, the
US makes the best software in the world today.
It’d be disastrous for us if that stopped happening. We should also design the best supersonic jet
engines, the best nuclear power plants, and the best agricultural technology.

We should understand that as a
consequence of technology and an economy of ideas, the gap between the rich and
the poor will likely increase from its already high-seeming levels. There is good and bad to this, but we should
be careful not to legislate against it, which will hurt growth. Technology magnifies differences in innate
ability; startups provide a framework to get compensated for it. But GDP growth ought to improve the quality of
life for everyone, and no growth will reduce quality of life for everyone
except the very rich. A safety net for legitimately
poor people is a good thing, and probably becomes more necessary in a world with
this sort of divergence. Quality of life
should improve for everyone; the bigger issue will likely be that people are
very sensitive to relative fairness.

Pro-growth tax and legal changes
are a good idea. As a consequence of a
high burn rate, we have to have high taxes.
But other countries don’t have this structural challenge, and so some
other countries have lower tax rates than we do. That makes them an appealing place to start a
business or live. By reducing our burn
rate, we can reduce taxes. We don’t need to go crazy here—there are a lot of
other factors that make the US a very attractive place to start a new
company. But it would certainly help. And tax policy should reward activity that
drives growth.

There are some easy legal changes
we can make to increase growth.
Immigration for entrepreneurs and skilled technology workers is an
obvious one; we should want the best people creating value here, not elsewhere
in the world. Tort reform is
another—legal protection is of course important, but it’s gotten so silly that
it discourages innovation.

There is a lot more we can do. Most of it is difficult, but growth it is the
critical issue.

As a closing thought, the Airbnb
founders used to draw a forward-looking growth graph that they wanted to hit. It was their number one priority; they put it
up on their desks, on their refrigerator, and on the mirror in their
bathroom. You build what you measure,
and they built growth. That seemed to
work pretty well for them.

It’s not as easy if you’re the US
government. But probably not impossible,
either, and it would at least point us in the right direction.

Thanks to Paul Graham, Nick Sivo,
and Peter Thiel for contributing ideas that led to this blog post.